Can Golden Parachutes Still Fly?
The news stories can make your jaw drop. A large company appears to be in major financial trouble, or declares bankruptcy and closes its doors completely. Then the CEO, who outsiders and commentators blame for steering the ship right into the ice floe, walks away with a pat on the back and a small fortune in severance.
These ‘golden handshakes’ or ‘golden parachutes’ as they are known are often large sums of money that make up part of an even larger severance package, usually agreed to as part of an executive’s initial hiring package. These sums can be combined with stock options, corporate shares, or other perks that put some of the more notorious deals into the tens of millions.
Let’s use Target as an example. While Canadian shoppers were overjoyed at the news that the American department store chain would be coming North in 2013, excitement quickly faded as the stores failed to please consumers, and the chain closed its Canadian doors just two years later. Meanwhile, in the US, Target's former CEO Greg Steinhafel resigned in 2014, in part due to the company’s poor-performing Canadian expansion. Between his severance payment, pension, stock options and other perks, the ex-CEO’s total takeaway was roughly $61 million. In comparison, Target’s total fund to pay out all terminated Canadian employees was only $70 million.
While these payouts once seemed like a staple of ‘corporate America,’ the trend has become popular in corporate Canada as well. The Globe and Mail reported that in 2008, the former head of BCE Inc., Michael Sabia, left the company with a $21 million exit package in “severance, stock options and incentives.” In 2009, the CEO of Manulife received just over $12 million for stepping down after just over 5 months of work, and the former head of Torstar (the Toronto Star’s parent corporation) received close to $10 million as part of a deal that guaranteed him the same amount whether he resigned or was terminated.
These numbers can seem difficult to comprehend, especially if a CEO appears to have failed in their role. Yet those 'failures' are usually far more complicated than they would seem, and often these payouts can be guaranteed regardless of any performance issues. They are also something of an industry standard, especially in larger corporations. When it comes to attracting a expert new CEO, these attractive perks can be necessary to lure top talent into a corporation; otherwise they will simply head elsewhere for a better offer. In essence, there are two sides to the coin (or millions of coins, in this case).
But what about public employees, whose salaries are more than fair game for public scrutiny? The most obvious example is Members of Parliament, who are eligible for a lump-sum six-month salary payout when they leave their post, whether through defeat or simply deciding not to run again. Alternatively, MPs who have served over six years can opt for a pension instead of severance. Still, should a public servant who decides to leave their post be eligible for an automatic severance payment?
In Ontario, the tide seems to be turning against these public sector payouts. Earlier this month the Province launched a new initiative placing limits on grand executive payouts and cutting off other associated perks. The moves brings new regulations to the Province’s Broader Public Sector Executive Compensation Act, which is a law passed in 2014 that aims to bring more transparency to the salaries of public sector executives, such as in hospitals, universities, and school boards, who make over $100,000 per year.
Previously, the legal framework was targeting a salary freeze on certain sectors. Now, the new regulations are making these public organizations develop a compensation framework to explain their executive payouts, and to make these compensation plans easily available to the public over the next year.
There are limits to the application of the law, and some public institutions, such as municipalities, where the law does not apply. On the whole, though, the change marks an increased awareness that these large-scale executive payouts can be offensive to the sensibilities of the working public, at least in cases where the public is footing the bill.
Of course this kind of change is unlikely to come in the private sector. If Canadian corporations were barred from attracting talent with lucrative offers, then American businesses will continue to welcome them with open arms and wallets. Yet consider again that in most corporations change may not be necessary at all. It is irresponsible to paint all executives with the same brush. For every troublesome or irresponsible CEO, there are thousands more doing fantastic work at keeping their companies afloat. They help their companies not only to flourish financially, but also to remain the employers that the economy depends on. That said, they may not have taken that role at all had it not been profitable to do so.
The bottom line is that no two ‘golden parachutes’ fly the same. While the amount of a CEO's severance may be staggering, take a moment to consider the complexities behind the scenes. The individuals and their stories behind the numbers may be just as surprising.